The Math of the Nebraska Beginning Farmer Tax Credit

While out and about at workshops, I’ve been speaking about the Nebraska Beginning Farmer Tax Credit. Today, I want to build upon an idea from the workshops, which is how to use the tax credit to provide more than a three-year lift to a beginning farmer.

But first, a recap of the tax credit. An individual is eligible for the tax credit if they are the owner of an agricultural asset located in Nebraska and lease the agricultural asset to a beginning farmer for three years. An agricultural asset is land, breeding livestock, grain bins, machinery etc.; however, note that a residence is not an agricultural asset. The rental price must be based upon An agricultural asset may only be used once in the program. For example, the same parcel of land cannot be used to obtain the tax credit with successive three-year leases to beginning farmers.

A beginning farmer is defined as a person who has farmed for 10 out of the past 15 years. A person’s age is not considered, meaning someone can be a 40-year-old beginning farmer. The net worth (all assets minus all liabilities) of the beginning farmer must be under $200,000. The beginning farmer must have some education and/or experience in farming or ranching and must provide the day-to-day physical labor and management. The beginning farmer must also follow a soil management program if such a plan is in place or provide a narrative of how the farmer will maintain the soil/nutrients. A beginning farmer is eligible for the program so long as the beginning farmer is a person who has farmed less than ten out of the past fifteen years. But keep in mind that this eligibility requirement is for the beginning of the three-year lease, not the entirety of the lease. Finally, the beginning farmer and owner of agricultural assets may be family members, but a succession plan, such as a will, trust, or business entity, is required which passes the leased agricultural asset to the beginning farmer.

If the above requirements are all met, the owner of the agricultural asset receives a refundable Nebraska state income tax credit. (This means if the owner’s state income taxes are less than the tax credit amount, the owner will receive a refund in the amount of the tax credit not used to reduce income taxes.) The amount of the tax credit depends upon whether the lease is a cash lease or share lease. If the lease is for cash, the owner of the agricultural asset receives a 10% tax credit for Nebraska state income taxes. If the lease is a share lease (such as a share-crop lease), the owner of the agricultural asset receives a 15% tax credit for Nebraska state income taxes from the gross profits.

The above are the requirements in a nutshell. But, how can the tax credit be leveraged to assist a beginning farmer, especially in the context of a business succession by a farmer ready to retire?

Example 1:

The owner of the agricultural assets owns two parcels of cropland — Parcel A and Parcel B. Parcel A is 100 dryland acres and Parcel B is 150 irrigated acres. The owner decides to lease to a beginning farmer, who has five years of farming. The owner and beginning farmer sign a three-year lease for Parcel A and Parcel B. The rent is cash rent at $300/acre.

The tax credit available for the owner is 10% of the rent for Parcels A and B. The rent is $75,000/year. The owner receives a tax credit of $7,500 per year for three years for a total tax credit of $22,500.

Example 2:

Using Parcels A and B described above, the owner decides to lease to the same beginning farmer with five years experience. However, this time the owner leases Parcel A only on a three-year cash lease at $300/acre. After the three year lease and a successful landlord/tenant relationship, the owner leases for three years the beginning farmer Parcel B on a share-crop agreement, with the owner receiving 40% with corn traditionally averaging 200 bushels/acre at a (reasonably) predicted price of $4.50/bushel.

Is this possible? Yes, it is. First, Parcel A and Parcel B are separate agricultural assets and thus, can be leased at different times. It does not matter when an agricultural asset is leased, it only matters that the agricultural asset has not previously obtained the tax credit and it is leased for three years to a beginning farmer. Second, the beginning farmer is a beginning farmer at the start of the lease of Parcel A (and farms for years six, seven, and eight during the lease) and a beginning farmer at the start of the lease to Parcel B (and farms for years nine, ten, and eleven during the lease). The tax credit is concerned with the beginning of the lease for eligibility of a beginning farmer, not whether the beginning farmer surpasses ten years of farming during the time of the qualifying lease.

Since this is a possible arrangement, what does the math show? For Parcel A, the owner receives a tax credit of $3,000/year for three years ($30,000 rent/year at a 10% tax credit). For Parcel B, the owner receives a tax credit of $8,100 per year for three years. This number is found by calculating 150 acres multiplied by 200 bushel/acre multiplied by 40%, which equals 12,000 bushels for the owner. Next, 12,000 bushels is multiplied by $4.50/bushel, equaling $54,000. Fifteen percent of $54,000 is $8,100.

The total tax credit for Parcels A and B is $33,300.

Example 3:

The owner of the agricultural asset’s daughter is returning to the farm after obtaining her degree in agronomy. The owner owns 500 acres of tillable land, machinery, and grain bins. The land is three separate parcels; Parcel A is 100 dryland acres, Parcel B and C 200 acres center pivot irrigated each.

The owner signs a three-year lease for Parcel A to his daughter for $100/acre in her first year of farming. The daughter wants to continue farming after those three years and the owner then leases for three years Parcel B to his daughter at the start of her fourth year of farming at $325/acre. The farmer also leases storage for three years in a grain bin to his daughter for .10/bushel. The daughter stores her harvest in the bins. Things are still going well in year seven of the daughter’s return to the farm. The owner then leases for three years Parcel C to his daughter at 50% share-crop and his machinery for $5,000/year. Parcel C traditionally produces 190/bushels of corn per acre and it is estimated that the price for corn will be $4.00/bushel.

Assuming the daughter remains under the $200,000 net worth requirement and a succession plan is in place, the above arrangement is possible. The tax credit for Parcel A is $1,000/year for three years, for a total of $3,000. The tax credit for Parcel B is $6,500/year for three years, for a total of $19,500. The tax credit for Parcel C is $11,400/year for three years, for a total of $34,200 for three years. The tax credit for the machinery is $500/year, for a total of $1,500 for three years. The tax credit for the grain bin is $380/year (assuming 190 bushels per acre for 200 acres), for a total of $1,140 for three years.

Total tax credit for all parcels, machinery, and grain bin is $59,340.

Conclusion:

The Nebraska Beginning Farmer Tax Credit provides a mechanism for Nebraska’s farmers and ranchers to help assist in retirement by providing a possible means of income to a beginning farmer but also allows a beginning farmer to start or expand their operation. Have more questions or need some help with the math? Feel free to contact us!

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Legal Aid of Nebraska's Farm and Ranch Project is the oldest continuously operating farm legal services program in the United States. Due to a grant from the USDA's National Institute of Food and Agriculture Beginning Farmer and Rancher Development Program, Legal Aid of Nebraska has the opportunity to further its range of services to Nebraska and South Dakota farmers and ranchers.